Iron ore recovery offers budget boon hopes

Treasurer Scott Morrison is facing a potential multibillion-dollar revenue windfall as he prepares his first budget, with a surprising rally in the price of iron ore coming at just the right time for the government.

The commodity has surged to its highest level in three months – putting it back to about $US48 a tonne –as Chinese steelmakers ramp up production after their Lunar New Year break, a sign that global demand for iron ore could increase significantly in coming months.

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"The Reserve Bank's commodity price data will say December was a stinker, and when we get the December terms of trade numbers they'll be pretty sobering, and there's no particular sign that wage inflation is picking itself up out of the gutter," he said.

"It's occurring against a backdrop of stiff headwinds in commodity prices generally, and weakness in wage growth."

Economists have been warning that with commodity and energy prices generally weaker than when former Treasurer Joe Hockey delivered his 2015-16 budget, Mr Morrison will still have to prepare for weak or declining company tax receipts.

"Although iron ore is important, LNG is going to be increasingly important to the budget outlook because LNG projects are starting to come on-line and production is being ramped up," said HSBC chief economist for Australia Paul Bloxham.

"So the price of LNG is going to be increasingly important for the outlook as well, and a lot of the price tends to relate to the oil price, which has fallen dramatically since last year's budget," he said.

And there are also mixed views over the direction of the iron ore price, with conflicting estimates from economists from the big investment banks.

Citi is among the most bearish on iron ore, forecasting the price will only average between $US37 per tonne and $US35 per tonne between now and 2018.